Shares of Foot Locker (NYSE:FL) dropped an astonishing 19% after the company reported slightly disappointing Q2 earnings. Q2 is typically the least important from both a sales and profitability perspective, and I think the market overreacted to a mediocre comp sales number, failing to look at the release slate for Q3 and Q4. Additionally, although comps were not spectacular, several other financial metrics indicate that Foot Locker is in healthy shape heading into the back half of FY19. Overall, I believe shares of the sneaker retailer look undervalued, and I added to my position on the dip.
Q2: The comp blurs an otherwise fine quarter
Comp sales grew only 0.8% y/y in Q2 compared to guidance of low-to-mid single digit growth and on top of a fairly weak 0.5% comp in Q2'18. The market was looking for 3% growth, but I think the release cadence in Q2 from key partner Nike (NKE) was a little slower than anticipated. It is also important to keep Q2 in context - in 2018, for example, Q2 accounted for 22% of annual sales and only 16% of EBIT. In terms of financial importance, Q2 is typically a fairly slow summer quarter that the company uses to clear some inventory.
In total, sales declined 0.4% y/y on a reported basis, but grew 0.8% y/y excluding currency fluctuations, to $1.7 billion. Although this may not be great growth, it is positive growth, nonetheless. Management noted that many releases were either moved into Q1 or Q3, so the total sales growth came in a bit below expectations.
Geographically, a few banners across North America performed well with Foot Locker Canada up low double-digits, Champs up mid-single digits, and Foot Locker US up low single digits. This strength was offset by a high single digit decline at both Foot Action and Eastbay, so, on
